Dollar sees significant gains against Colon on wholesale market

Let me try too, not because I disagree with Tim’s answer, but because I am less well-versed in the jargon of economics and have to think these things through in my own dumb gringo way.

Part of US policy in response to the recession was to print more dollars than it otherwise would have printed. When you print more dollars, the basic law of supply and demand means that the prices of goods will go up, which is inflation. For instance, $6 chasing the same lunch that used to cost $5 will result in that lunch costing $6 instead of $5, simply because there’s more money trying to buy the same lunch.

The confusing part of this is that the US didn’t experience much noticeable inflation as a result of more dollars being printed ($5 lunches didn’t increase to $6), but this is because the dollar-printing policy was actually designed to offset deflation. Had more dollars not been printed, the price of a $5 lunch would have declined to like $4.25. Thus, inflation existed in the US, but was masked because it was reflected in stable rather than falling prices.

Now, I’m ignorant of most of the policy justifications for this kind of dollar-printing stimulus policy, but I generally know that deflation really monkeys with the financial sector. It has to get into negative interest rates and other crazy stuff. Thus, the powers that be in the US opted to prevent deflation by printing more money for the sake of the stability of the US economy.

Enter the rub for expats: More dollars make each dollar worth less in the global market, including the global market for other currencies like the colon. Thus, while the price of a $5 lunch in the US didn’t rise to $6, the price of 3000 colones (about the price of lunch in a fancy CR soda) did increase from $5 to $6. The inflation that was masked in the US, because it was mainly offsetting deflation, was visible outside of the US and reflected in currency exchange rates.

Presumably, as the US prints fewer dollars now that the US economy is apparently in recovery, the value of the dollar will increase globally, including against currencies like the colon. However, as Tim notes, there are always a zillion other variables, including some unique to CR.

Big picture is that those of us living abroad on dollars have paid for the US economic recovery. To some extent, those living inside the US on dollars have also paid for it, but only by failing to see declining prices rather than seeing rising prices, the way expats have. Perhaps, I don’t know, we benefit too from the stability of the US economy, so maybe it’s been worth the cost, but I tend to view it as a hidden tax we’ve all paid to pay for mistakes made by folks in the US financial industry.

John, if you check that graph, and continue the uptrend line of the dollar, you can see it should be about 750 now. Multiply the price you are presently paying by .7 and prices would once again be reasonable.